Canadian dollar reaches one-week high on Fed stimulus wagers

The Canadian dollar rose to a one-week high against its U.S. counterpart (FOREX:CADUSD), which weakened on speculation the Federal Reserve will maintains monetary stimulus amid economic disruption from the 16-day government shutdown that ended yesterday.

The currency gained for a second day as U.S. congressional passage last night by wide margins allows the U.S. to avoid the possibility of default and ends the shutdown that began Oct. 1. President Barack Obama signed the bill just after midnight. Prime Minister Stephen Harper said yesterday he supports legislation to end Canadian budget deficits and to stimulate economic growth through trade and resource development.

“I would have expected a bit more of a relief rally in risk assets,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said by phone. “Nevertheless, with the U.S. dollar falling lower, the Canadian dollar is trading higher. We think the Fed is moving slowly towards tapering and until we get clarity on what the message is from the next big data point we’ll probably stay in these ranges.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, gained 0.3% to C$1.0294 per U.S. dollar at 10:10 a.m. in Toronto. It touched C$1.0292, the strongest since Oct. 7. One loonie buys 97.14 U.S. cents.

Bonds Gain

Government bonds rose, with the yield on benchmark 10-year notes dropping four basis points, or 0.04 percentage point, to 2.58%. The 1.5% security maturing in June 2023 rose 29 cents to C$90.89.

The Bank of Canada sold C$3.3 billion ($3.2 billion) of two-year debt yesterday at a yield of 1.280%. The 1.25% securities mature in February 2016.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.8, the most for a two-year note since the Aug. 21 auction.

Purchases of Canadian securities by foreigners slowed in August as investors sold government bonds. While foreigners bought a net C$2.03 billion of bonds, they sold C$1.22 billion in government debt, including C$883 million in federal issues. Foreign investors sold a net C$2.4 billion of Canadian government bonds between January and August, Statistics Canada said, compared with net purchases of C$28.7 billion in the same period a year earlier.

Total purchases so far this year have slowed to C$24.0 billion, less than half of the C$51.2 billion total for the same period in 2012.

The currency has fallen 2.5% this year against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The Australian dollar is down 6.5%, and the U.S. dollar has added 1.6%.